....the Bundesbank has yet to drop interest rate even though much of Europe already has. This is how a real currency to managed. Price stability and currency value is the most important thing.
On the other hand, at the first sign of trouble, the U.S. Federal Reserve lowered interest rates. Not once, but twice. Anything to prop up the system and excesses.
Part of the explanation lies in history. The defining economic event for Germany in the 20th Century was the hyperinflation of the 1920's. Many feel that this was the single most important factor leading to the Nazi's coming to power. Thus, no German government will dare risk inflation.
Whereas in America, the defining economic event was the deflation of the 1930's. Democracy and capitalism almost came undone as unemployment soared to 25%. And, 3500 banks failed while the Fed dithered -- and deposit insurance was zero. Yes, the Hoover administration attempted corrective measures -- but always of the "dollar-short-and-a-day-late" variety. It was not the Fed's finest hour.
In more recent history, the single biggest blemish on Chairman Greenspan's tenure, from a centrist viewpoint, is his failure to loosen the monetary reins soon enough to ward off, or at least limit, the recession of the 1990's. He does not want to repeat that error now.
In Germany's recent history, the politics of reunification led Kohl to value the former East Germany's currency at parity with the deutschemark. At the same time, East Germany's output of goods and services were largely uncompetitive in a global marketplace. Thus, the money supply exploded at the same time that East Germany's output collapsed -- a classic case of too much money chasing to few goods and services. Naturally, the Bundesbank slammed on the monetary breaks.
Finally, the Fed, by default, is the de facto central bank to the world. The responsibility for global stability ultimately devolves upon the U.S. Germany's most important international responsibility is keeping its own house in order. Thus, the U.S must balance the requirements of global capital markets for hard currency with their need for liquidity and political stability. |
